Commentaries (some of them cheeky or provocative) on economic topics by Ralph Musgrave. This site is dedicated to Abba Lerner. I disagree with several claims made by Lerner, and made by his intellectual descendants, that is advocates of Modern Monetary Theory (MMT). But I regard MMT on balance as being a breath of fresh air for economics.

Tuesday, 30 December 2014

I have big reservations about a popular alleged cure for austerity in the EZ periphery. The alleged cure is STIMULUS.

Now do proponents of that cure think no one has thought of that?

The exact form of that stimulus needn’t concern us here: it can be conventional QE or what is sometimes called “QE for the people”. That’s printing new money and handing a dollop of money to every citizen. Another alternative is to have periphery governments borrow and spend more (and/or cut taxes). But that raises government debts.

The IMPORTANT point is that austerity is not being imposed on the EZ periphery just for fun, or because core countries are sadists. The central problem is that the periphery has become uncompetitive relative to the core. Ergo some way of cutting periphery costs must be found, and a period austerity or deficient demand will solve that problem (eventually).

Of course the latter “cure” involves serious costs, economic and social, but given the existence of the Euro, can you think of anything better?

Where each country has its own currency, lack of competitiveness doesn’t matter so much: uncompetitive countries can devalue. In a common currency area, they can’t. That’s the problem.

Another solution, or at least partial solution would be more EZ wide stimulus including more stimulus in core countries (aka Germany). That could easily mean more inflation in Germany. But arguably adjustments in relative competitiveness are less painful if brought about by inflation in competitive countries as opposed to deflation in uncompetitive ones.

On the other hand you can’t blame Germans for being sceptical: in the view of many Germans, any stimulus in Greece will simply result in Greeks doing what they’ve done before, namely put in for unwarranted pay increases, which makes them less competitive, which defeats the object of the exercise.

Fiscal union.

Another popular quack cure or at least questionable cure is fiscal union. You’ve probably seen it claimed a dozen times that the basic EZ problem is that the EZ has adopted monetary union without fiscal union.

Certainly fiscal union MIGHT help: it would involve hand outs by core countries to periphery countries in the same way as wealthier parts of the UK hand out assistance to less well-off areas of the UK. But there’s a limit to the generosity of wealthier parts of the UK or EZ. So fiscal union is no panacea.

If Germans don’t feel like being ultra-generous towards Greece under existing arrangements, presumably they’re not going to be ultra-generous given fiscal union.

Conclusion.

Stimulus just isn't a cure for austerity in the Eurozone periphery: at least, if it’s going to be implemented, it first requires Germans to accept the possibility of higher inflation, and Germans are unlikely to do that.

Monday, 29 December 2014

I gather that King (former governor of the Bank of England) said this morning “We have not yet got to the heart of what went wrong.” That was on the BBC’s Today programme. Well that’s cause for optimism!I’ve actually noted before that Mervyn King is a bit of an academic dreamer who DOES PRODUCE occasional flashes of insight into banking problems: indeed Positive Money quotes two or three passages of his. But he isn't one to “effing solve this effing problem by this time yesterday”.Of course no one can go around effing and blinding while governor of the Bank of England. But it would be nice if he was a bit more decisive.

Sunday, 21 December 2014

This is in the Kansas City Fed office. I'm not sure exactly what's going on, but looks like you can print your own notes with a choice of currencies, amounts, patterns etc. This is all perfectly legal, as long as your DIY notes don't look too much like the country's central bank issued notes.It's a good educational tool: it illustrates Hyman Minsky's point that "Anyone can create money: the problem is getting it accepted". I.e. if you printed your own dollar bills using the above Fed printing machine, your chance of getting them accepted in local shops would be effectively zero. In contrast, J.P.Morgan, Citibank, Lloyds, Barclays etc can in effect print money (though not in the form of physical notes). Having printed money (in book-keeping or digital form) those banks can then lend out their "notes". Those banks promise to swap their "notes" for central bank notes. But as long as those "privately issued notes" are lent to responsible borrowers, not too many people will demand the latter swap. Nice work for private banks.Picture taken by Stephanie Kelton (I think).

Wednesday, 17 December 2014

Frances Coppola describes
the above as her “favourite equation”. I think the equation has problems. Re the letters / symbols:

S = Private sector saving.

I= Private sector investment.

G= Government spending.

T=Government income, i.e. tax.

X =Exports.

M=Imports.

One problem with the equation is that there is no sharp
dividing line between “I” (investment) and current spending. To illustrate, if
I buy something that will last a year, is that an “investment”? Or does it have
to last two years, three years or what?

And if the dividing line is one year, that implies that if I buy something
that will last 360 days that’s not an investment, so (S-I) remains unchanged,
whereas if I buy something that will last 370 days, then (S-I) is reduced by
the amount of the “investment”. That is clearly a nonsense.

Worse still, if someone buys bonds in some domestic (i.e. not foreign)
corporation, that counts as an “investment” as per normal use of the English
language, but the flow of money there remains entirely within the domestic
private sector, so there’s no change to G-T or X-M. Yet if that purchase of
bonds counts as an investment, then S –I changes. A self-contradiction.

I suggest the equation is better written as S=(G-T)+(X-M), where all
symbols refer simply to movements of cash. E.g. S is simply “domestic private
sector” savings or accumulations of cash. Also, (X-M) is not “trade balance” as
is often suggested: it’s movements of cash in payment for exports and imports
(not quite the same thing).

__________

P.S. (1st Jan 2015). If you think I’ve got my knickers in a twist over this, you’d be right. But getting all the definitions (of S,I,G,T etc) right is not easy: JKH devotes 17,000 words to the above simple equation. I’ll try to sort it out in about one hundredth that number of words. Here goes.

As JKH rightly points out, “(S – I) is the saving delivered from outside the private sector; (I) corresponds to saving delivered from within it.” Thus as far as sectoral balances go, “I” is irrelevant: it’s a movement of assets WITHIN a particular sector – the domestic private sector. So in that case, the equation might as well be written S=(G-T)+(X-M), where S is defined as something like “net accumulation of assets by the domestic private sector from the government and foreign sectors during some given period”.

Tuesday, 16 December 2014

Alternative title: The popular idea that public investments should be
expanded while interst rates are low is invalid.

Summary (in purple).

The purpose of a
deficit is, or should be to impart stimulus, and deficits do that by, amongst
other things, increasing private sector paper assets – specifically base money.
That increased stock of liquid assets induces the private sector to spend.

The AMOUNT of deficit
needed is whatever overcomes the private sector’s desire to save or hoard base
money – i.e. saving money causes excess unemployment, as Keynes pointed out.
But base money on which interest is paid equals government debt, as pointed out
recently by Martin Wolf, and the higher the interest offered, the more will be
saved.

But what’s the point of
that interest when the only effect is to induce more saving? It’s completely,
totally, 100% pointless: the only net effects are to burden the taxpayers who
fund the interest, and benefit the rich (those who hoard base money). Ergo a
deficit should and will cause the stock of base money (aka bank reserves) to
rise, but there is no excuse whatever for it causing a rise in the debt.

The only possible
exception to the above rule comes in as far as a deficit funds infrastructure
or other public investments: that’s an old idea sometimes called the “golden
rule”. That rule was recently endorsed by Ed Balls. In
fact that public investment so called exception is almost irrelevant. Thus the
above rule that a deficit should never increase the debt is near watertight.

______________

The purpose of a deficit is to make up for inadequate private sector
spending: that is, if private sector spending is not enough to keep the economy
working at capacity, demand needs to be increased by having government spend
more than it collects in tax.

But the only possible explanation for inadequate private sector spending
is a desire by the private sector not to spend! (Forgive the statement of the
obvious). That is, the explanation must be a desire by the private sector to
save money rather than spend it. Indeed, the latter point is simply a
re-statement of Keynes’s “paradox of thrift”: that’s the idea that while thrift
is in a sense desirable, hoarding money does have an undesirable side effect,
namely that it reduces demand (assuming the saved money is not loaned out and
spent).

Now of course the amount the private sector wants to save / hoard is
influenced by interest rates: the higher the rate of interest, the more people
will save. But normally central banks do not offer interest on money lodged
with them: i.e. they don’t pay interest on reserves, and quite right.

Indeed, if interest IS OFFERED on base money, then that base money in
effect becomes government debt. Or as
Martin Wolf
put it, “Central-bank money can also be thought of as non-interest-bearing,
irredeemable government debt. But 10-year Japanese Government Bonds yield less
than 0.5 per cent. So the difference between the two forms of government “debt”
is tiny…”

Indeed, paying interest on base money / government debt is totally and
completely pointless, at least where the purpose of that base money is to
impart stimulus. The only net effects are, 1, to place an extra burden on
taxpayers who fund the interest payments, 2, subsidise the rich (those who
hoard base money), and 3, increase the total amount of base money that has to
be issued.

Incidentally, it should of course be said that deficits don’t cause
increased demand JUST because private sector paper assets are increased. There
also the fact that where government spends more (e.g. on health and education) that
will increase employment in schools and hospitals. Alternatively, to the extent
that government effects the deficit via tax cuts, then increased household
after-tax incomes will increase household spending.

Infrastructure.

A possible exception to the above rule that a deficit should never
increase the debt comes with public investments, like infrastructure.

It is widely believed that government investments should be funded by
government borrowing rather than by tax. In fact that point is debatable.
Kersten Kellerman (1) argued in a paper in the European Journal of Political
Economy that public investments should be funded by tax, not public debt.

However, it doesn’t matter for the purposes of the argument here whether
public investment is funded by tax or borrowing. Assume they’re funded by tax
if you like. Alternatively, assume they’re funded via borrowing, with the rate
of interest paid being the same as would be paid to a private contractor who
provided the relevant assets / investments.

Note that if those investments ARE FUNDED by debt, the total size of that
debt will remain pretty well fixed because the total amount or value of public
investments relative to GDP does not vary much from year to year, or even from
decade to decade. And since stimulus is all about VARIATIONS in the amount of
debt / base money, public sector investments won’t have much to do with
stimulus.

Expand investment in a recession?

A possible objection to the latter point about raising public investments
in a recession is the popular idea that it’s positively DESIRABLE to expand
public sector investments in a recession. Unfortunately there is a shortgage of
“shovel ready” schemes.

Worse still, even if some of such schemes CAN BE started quickly, it can take
several years, even DECADES to complete such schemes: by which time the next
recession will probably have come and gone, which makes those investments a
very inappropriate way of dealing with recessions.

In short, it’s CURRENT spending, not CAPITAL spending that needs to be
boosted in a recession.

Raise public investments while interest rates are low?

Let’s assume that public investments are funded by borrowing rather than
by tax. I suggested above that interest should be paid on the relevant public
debt, but that interest should not be paid on base money. Now an obvious
problem there is that holders of base money will buy public debt in large
amounts: why get zero interest on money you’ve placed with government when you
can get interest?

That in turn tends to depress the rate of interest on the debt: indeed
many governments can currently borrow at ultra-low rates. However, that low
rate on public debt only exists because government stands behind the debt, and
governments are EXTREMELY credit worthy compared to private corporations in
that governments can grab any amount of money from taxpayers even if the
investments made by government are a disaster.

In short, the low rates of interest at which government can borrow stem
largely from the coercive powers of government. Those powers are not a realistic
basis for making decisions about which investments are viable or whether the
total amount of public investment should be expanded.

And a final reason for ignoring low interest rates when it comes to funding
public investments is that adjusting interest rates is not a good way of adjusting
demand for reasons set out here.

______

1. “Debt financing of public investment: On a popular

misinterpretation of “the golden rule of public sector borrowing””. European
Journal of Political Economy.

Sunday, 14 December 2014

The UK Labour Party’s finance spokesman, Ed Balls, has a great idea for
cutting the deficit:
have government borrow to fund public investment, and don’t count that
borrowing / expenditure as part of the deficit.

And on the face of it, that’s perfectly sensible: after all, borrowing to
fund investment is what every other firm does. Plus it’s what every other
household does when “investing” in a house to live in. However, there’s a catch
as follows.

Where any entity borrows to fund investment, normal practice is to repay
the debt as relevant assets depreciate, or when the asset isworn out and is scrapped. Indeed, if the debt
CAN’T be repaid as the asset depreciates, that’s good evidence that the
investment is not viable.

Thus if government is to fund investment via borrowing, then it can’t
borrow an amount equal to each year’s NEW investment: it can only borrow an
amount equal to “new investment less depreciation on existing investments”. And
assuming total investment by government expands at the same rate as GDP, that
means the NET ANNUAL INCREASE in government investment is piddling: between 1%
and 2%.

The great Balls conjuring trick collapses like a house of cards.

Borrowing versus tax.

Next: does it greatly matter whether government funds investment from
borrowing or from tax? Personally I don’t think so. Milton Friedman and Warren
Mosler advocate/d that government should borrow NOTHING. I.e. they argue/d that
the only liability the state should issue should be base money.

However, given that there are two ways of funding public investments, i.e.
borrowing and tax, presumably one must be better than the other. Personally I
can’t work out which. At least I can’t work out which would be better in a
closed economy. Inspiring ideas on that topic will be welcome.

Total amounts borrowed and invested.

Incidentally, I recently had a look at the total figures for borrowing by
the UK government and total investments or assets held by government. The two
totals are VERY ROUGHLY the same: certainly one total isn’t double the other.

So what does that prove? That there’s no good reason to cut the debt? I
don’t think so: suppose those dreaded bond vigilantes and/or foreign holders of
UK debt lose faith in the UK and start demanding an extortionate rate of
interest? Do we pay them? I suggest not.

I suggest we pay down the debt. Or put another way, I suggest we, 1, pay off some or all creditors, 2, stick two
fingers up at them, 3, tell them to go away and tell them we’ll fund
UK based public investments out of our own resources, thankyou very much.

Saturday, 13 December 2014

Lending clubs seem to be doing well in the US. Far as I can see, they are
fully compatible with the principles of full reserve banking. Under both
regimes, saver / lenders carry any loss
stemming from the loans they have chosen to make, rather than taxpayers
carrying some or all of the loss. (That's in stark contrast to the sub-human scum running large Wall St banks who have recently been trying to get taxpayers and ordinary depositors to stand behind their derivative bets.)

The only difference between lending clubs and full reserve is that under full reserve, at least as advocated by
Laurence Kotlikoff, Positive Money and others, saver / lenders choose what
CLASS OF borrower to lend to (e.g. safe mortgagors, NINJA mortgagors,
businesses, etc), whereas with lending clubs, saver / lenders choose which
INDIVIDUAL borrowers to lend to.

To be more accurate, under full reserve banking, the bank industry is
split in two: a totally safe half with lodges money only at the central bank
and perhaps also invests in short term government debt, and second, a lending
half. Lending clubs (to repeat) comply with the rules of governing the lending
half as proposed by Kotlikoff, PM, etc. But obviously they don’t supply the
above “totally safe” method of lodging money. However, that totally safe
facility is already in existence in some countries sort of (in the form of
National Savings and Investments in the UK). NSI does not provide quite the
flexibility (e.g. issuing cheque books and debit cards) that is needed, but NSI
gets close – money can be withdrawn from NSI within about 24 hours via
telephone I believe.

Non-peer reviewed (or only lightly peer reviewed) publications. The coloured clickable links below are EITHER the title of the work, OR a very short summary (where I think a short summary conveys more than the title).

i) The above is not a complete list in that earlier versions of some papers have been omitted. For a more complete list see here, and “browse by author” (top of left hand column).

ii) 7 deals with a wide range of alleged reasons for government borrowing, including Keynsian borrow and spend. 6 is an updated version of the "anti-Keynes" arguments in 7. 5 is an updated version of 1, which in turn is an updated version of 4.

______________

.

Bits and bobs.

.

1946 article by the chairman of the New York Fed arguing that taxes are irrelevant. He overstates his case a bit. But’s an interesting bit of history all the same.________EU owes Britain £9.3bn.________

Imbecile at the top of the IMF, Olivier Blanchard, says he isn't sure how to deal with a recession should one hit next year. But that’s hardly news. As Bill Mitchell has pointed out over and over, the IMF and OECD are staffed by incompetents.________

I suggest it’s simply the fact that recent high unemployment has caused employees to be cautious about wage demands for the moment. Same effect apparent after WWII? I.e. the inflation / unemployment relationship was better in the 1950s and 60s than in the 70s and 80s: caused by the fact that employees in the 50s and 60s had memories of the 1930s?________

You want interest on the money you deposit at your bank? Then you want to be a money lender.

Fine: I admire people who to enter the world of commerce. But what on Earth makes you think there’s an obligation on taxpayers to rescue you if your little commercial venture goes wrong? Taxpayers don’t rescue those who put money into the stock exchange or who start small businesses if those go wrong.

Everyone has a right to a totally safe bank account which earns no interest. They DO NOT have a right to enter commerce in the form of having someone lend out their money and expect the taxpayer to rescue them if that does wrong.

J.P.Morgan fined billions for fraud. They pay the fine with money made from another fraud.________

The idea that accounts should be available to all at the central bank has a good pedigree: James Tobin advocated the idea in 1987 – p.172. ________

Contrary to claims by Stephanie Kelton, significant spare plant capacity does not prove the economy has spare capacity. Reason is that upping plant utilization requires more labour, and if employers cannot find suitable skilled labour, then there just ain’t any spare capacity. Put another way, what an economy runs short of as it approaches full employment of labour is . . . wait for it . . . labour!________

The golden rule of UK housing is that house owners are more likely to vote than non-owners, thus it’s important for every political party to suck up to house owners and make sure house prices keep rising. The result is that over the last 20 years house prices in the UK have doubled in real terms, while in Germany they’ve remained constant in real terms. Other countries could learn from British idiocy / wisdom (take your pick).________

Extra £10bn for Help to Buy housing subsidy results in main housebuilder shares rising by £1bn. Hope that helps you understand “trickle down”….:-)________

You deposit money in a one year term account at a bank: taxpayers insulate you against loss. You deposit money at a non-bank corporation by buying its one year bonds (which are the same thing as a one year term account) and taxpayers DON’T insulate you against loss. I don’t expect apologists for the existing bank system to explain this anomaly. There IS NO explanation for the anomaly. Conclusion: it is not the job of taxpayers to insulate money lenders against loss.________

Simon Wren-Lewis questions the validity of MMT. I left a comment, but it normally takes him a day or two to get round to publishing comments. ________

As long as government is willing to “insure” deposits of banks that speculate in this manner, it creates an obvious condition of “heads managers win” and “tails shareholders and taxpayers lose.” - Christopher Whalen.________

Regulators don’t know how to control banks, but racoons do....:-)________

.

MUSGRAVE'S LAW SOLVES THE FOLLOWING PROBLEM.

The problem. Deficits and / or national debts allegedly need reducing. The conventional wisdom is that they are reduced by raising taxes and / or cutting government spending, which in turn produces the money with which to repay the debt. But raised taxes or spending cuts destroy jobs: exactly what we don’t want. A quandary.

The solution. The national debt can be reduced at any speed and without austerity as follows. Buy the debt back, obtaining the necessary funds from two sources: A, printing money, and B, increasing tax and/or reduced government spending. A is inflationary and B is deflationary. A and B can be altered to give almost any outcome desired. For example for a faster rate of buy back, apply more of A and B. Or for more deflation while buying back, apply more of B relative to A